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January 18, 2019

MEREDA forecast: Modest growth expected, but concern over what's ahead for the economy

Photo / Peter Van Allen
Photo / Peter Van Allen
Leslie Preston, senior economist at TD Economics, said at the MEREDA conference Thursday that she expects modest growth for the year.

The Maine Real Estate and Development Association's annual outlook conference attracted more than 1,000 people on Thursday.

Coming off a particularly strong year, the forecast in various sectors was cautiously optimistic. There is business on the books for contractors, home prices are still on the rise and commercial and industrial space are in demand. The MEREDA Index was up slightly.

But there was also a good deal of discussion about when the next economic downturn might start and what that will look like. Consequently, most experts who spoke Thursday expect modest growth for the year.

In any case, the ballroom at the Holiday Inn by the Bay was packed, with considerable interest in each speaker's assessment of the real estate market.

Gary Vogel, president of MEREDA's board and an attorney at Drummond Woodsum, said the fact that more than 1,000 people had registered for Thursday's event "is a good leading indicator of real estate today in Maine."

Economic outlook

Leslie Preston, senior economist at TD Economics, said she's calling for modest growth this year. She said wage growth has challenged companies, especially combined with the labor shortage, making it harder for companies to expand. After a strong year, more modest growth in home prices is expected this year. Maine's economy grew at a rate of 2% last year, and she's forecasting somewhat less growth this year. "The economy is slowing, but it's not a recession," she said.

Pierce Atwood partner Andrea Cianchette Maker spoke of a "mood and a wave of cautious optimism" in Augusta under a new governor and a sense that the bipartisan gridlock is over with Democrats now the majority in both houses.

As for the work ahead she said that 2,041 bills had been submitted, but noted that the devil will be in the details of what's actually in them.

She also said that in 2019 MEREDA will seek a repeal of a bill that "slipped by last year" requiring commercial brokers to disclose the presence of abandoned or discontinued roads or easements across or abutting a piece of property they are selling. She later told Mainebiz the bill pertained to mail carriers and rural access roads.

Hospitality forecast

Steve Hewins, president and CEO of Hospitality Maine, said the hospitality industry in Maine is "dynamic and growing," as indicated by slow growth in occupancy rates and a strong hotel build-out.

The numbers are positive from Bangor north due to draws like revitalized downtowns, he said. Midcoast is also positive, but "a bit of a disappointment" due to a flattening of average room rates. York County is Maine's strongest market, with double-digit revenue growth, driven by increasing demand and expanded seasonality. Greater Portland, one of the nation's most expensive hotel markets at peak season, sees continued hotel, meeting space and eatery development that draws strong visitation year-round.

For 2019 and 2020, "we feel the market will continue to be strong," with Portland continuing to be a draw from the south, Hewins said. Based on sales tax receipts for restaurants and hotels, the industry topped $4 billion in 2018, up from $2.5 billion in 2009. Overall economic impact, with ancillary services, was $6.5 billion.

But local and foreign workforce availability is a significant problem limiting growth, along with affordable housing availability and pressures from the short-term rental industry.

Residential forecast

Vitalius Real Estate Group Principal Brit Vitalius called the multi-family market of 2018 "incredibly active" with sales volume and median sales prices up from 2017 but seeing considerable variability.

South Portland and Westbrook saw substantial volume increases, Vitalius said, but the rise in Portland and Saco-Biddeford slowed. Year-over-year price increases were "pretty staggering" in many instances, he said, with Portland two-units up 37% from 2005 and four-units up 54%. But 2018 began to see a shift from a previous climate of multiple offers to fewer buyers.

That resulted, for the first time in year, to price reductions. The multi-family market may be nearing its peak, he said.

For 2019, market and political volatility could impact buyer confidence overall. In Portland, he predicted values will flatten for prime locations, but could drop for sub-par properties. Regionally, he expected Westbrook and South Portland prices to flatten, but Saco/Biddeford and Lewiston/Auburn will see continued price increases and activity as their affordability attracts investors.

Portside Real Estate Group Principal Dava Davin said single-family residential inventory was tight and buyer demand strong through 2018.

A South Portland property, for example, drew 18 offers and sold 35% over asking price. Prices softened toward late 2018, but she expected value to pick up this spring. For 2019, millennial demand will surge and the number of homes for sale will increase, she predicted. But there will be fewer bidding wars and multiple offers.

That's good news, she said, because it leaves room for negotiations between buyer and seller. Davin predicted a future industry shift with the advent of technology called PropTech.

"This sector is the future of the real estate market," she said. New technology provides automated and virtual reality showings. The technology is taking hold outside of Maine; she predicted it will show up more in Maine in 2019.

Midcoast commercial transactions

Kevin Fletcher, a broker with Northeast Commercial Brokers at Keller Williams Realty, said 2018 was a great year, with the number of transactions up overall, although the inventory was tightening in certain areas and sectors like Class A office space and retail space. Development throughout the midcoast — like a 24-unit apartment project in Auburn that just broke ground; the nearly complete Hartley Block in Lewiston; the Marketplace at Augusta, the largest open-air shopping mall north of Boston; and Colby College's mixed-use Bill & Joan Alfond Main Street Commons in downtown Waterville — are helping to drive local economies and jobs, he said.

"I continue to remain extremely optimistic for 2019," he said.

Continued pockets of opportunities, he predicted, will include new residential construction and deals in service industries like medical and niche retail.

"I think we have a stable and healthy marketplace for the central Maine market," he said. "I think investment in that region will continue through 2019." Opportunities continue to exist despite tightening inventory, he said.

Bangor area outlook

Bev Uhlenhake of Epstein Commercial Real Estate said Bangor Savings Bank's new waterfront campus is the city's most important development, linking the downtown office market to the waterfront entertainment district.

Apart from that, in Bangor itself there hadn't been a lot of change in the office, retail and industrial markets since last year, though office vacancy has started to drop.

On retail, she spoke of "significant vacancy" at the Bangor Mall but said it shouldn't be written off, insisting it still "has a lot of chapters in its future."

She also sees a very vibrant and active retail community downtown. Elsewhere in the region, she highlighted developments including the Brewer Riverwalk and aquaculture in Bucksport and Belfast, saying, "These are the rising tides that float all the boats."

Southern Maine retail forecast

Experiential retail will lead the way in 2019, said Karen Rich, of Malone Commercial Brokers.

Retailers have found that brick and mortar stores are still viable, when combined with technology and other apps, in a lot of cases "bringing the [retail] experience to you," Rich said.

"I think it's an important distinction to make that it's now no longer 'us versus them', it's no longer bricks and mortar versus e-commerce," she said.

Retailers are finding that it doesn't matter if a customer buys online and gets the goods delivered, picks them up in the store, or goes to the store to buy — it's about "creating a loyalty factor."

She said retailers are also finding creative ways to change their sales approach to meet consumer expectations. An example is Kohl's department stores pairing with grocery stores.

"I think the key to bricks and mortar success is adapt, adapt, adapt," she said.

In 2018, southern Maine's retail climate was strong, with vacancy rate of 5.66% in Portland, South Portland, Scarborough, Falmouth, Westbrook and Cape Elizabeth. Average lease rates rose 19.32% across both prime and secondary markets, from an overall afterage of $15.11 a square foot in 2017 to $18.03 in 2018.

She said she thinks 2019 "will be a very good year" for southern Maine retail, but "landlords would do well to hold onto the larger tenants they have," because a lot of retailers are downsizing and filling that space may be a problem.

Southern Maine office forecast

Office space transactions dropped sharply for the second year in a row, Nate Stevens of The Boulos Co. said.

Flat demand and a lack of inventory accounted for fewer transactions in 2017 and 2018 combined than in 2016, he said. Given that, "large deals shaped the market."

After a steady several years of asking rates dropping, they increased in 2018 by about $2 a square foot.

"I'm not sure what that says about the market, but it says something about landlord confidence in the market," he said.

Landlords are also putting work into class B space to attract tenants as demand stays low, he said.

Things will change this year as Portland's development boom and some large sales transactions, including the Time and Temperature building downtown, put more class A space into circulation.

Southern Maine industrial forecast

The industrial space vacancy rate has risen, as well as lease rates, said Justin Lamontagne, of NAI The Dunham Group.

The 3.47% southern Maine vacancy rate "is historically pretty low, but significantly higher than last year" when it dipped below 2%, he said.

The trend isn't just true for southern Maine. "Every municipality and town [surveyed] saw an increase in the vacancy rate," he said.

He said while a lack of land inventory to building on and increased construction costs, many owners/users who can are building their own space, a trend that will continue in 2019.

But he said it's "still good to be a landlord."

He said that while marijuana grower use of industrial buildings has slowed because of lack of regulatory direction, craft brewing use will continue.

"Is it slowing down? Yes. Is it coming to an end? I don't think so," he said. Craft brewers are leveraging their real estate in a way that combines industrial and retail, and the trend is also focusing on hyper-local, he said.

"Instead of the neighborhood bar, you have the neighborhood craft brewery," he said. The model is proving economically sustainable. "It's catering to a specific crowd, a niche area," he said.

Editor's note: Peter Van Allen, Renee Cordes, Maureen Milliken and Laurie Schreiber contributed to this report.

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